IMF, ADB raise 2016 growth outlook for PH

THE International Monetary Fund (IMF) and the Asian Development Bank (ADB) have both revised upward their 2016 growth forecasts for the Philippine economy to 6.4 percent on the back of strong investment, private consumption, and the government’s plan to improve infrastructure and human capital.

In separate reports released Tuesday, the IMF and ADB both said the Philippine economy could grow by 6.4 percent this year, higher than their previous forecast of 6 percent.

The economy grew by 7 percent in the second quarter of the year, bringing the first-half expansion to 6.9 percent.
IMF and ADB’s latest forecast is well within the government’s 6 percent to 7 percent official target this year.

Sustaining the solid economic performance will require a continued domestic reform agenda and capacity-building investments, they said.

Favorable outlook
In a statement on the conclusion of its Article IV consultation with the Philippines, the fund said the outlook for the economy remains favorable despite external headwinds.

They noted, however, that the macroeconomic performance has not led to corresponding improvements in poverty reduction, inequality, and unemployment.

“They considered that the administration has an opportunity to put the economy on a higher and more equitable growth path,” the IMF noted.

Its directors supported the government’s goal to accelerate poverty reduction and their priorities on structural reforms.

“They called for well-targeted infrastructure and social spending, including for education and health, especially in rural areas, as well as continued efforts to enhance competition and open the economy to foreign investment,” the fund noted.

The IMF directors also encouraged efforts to increase investments in infrastructure and human capital, improve targeting of social spending, enhance competitiveness and foreign direct investment, and making the financial system deeper and more inclusive.

In this regard, it projected unemployment to decline to 5.9 percent in 2016 and 5.7 percent in 2017.

“They noted that this would allow a welcome boost to infrastructure and social spending, while ensuring fiscal sustainability” it said.

Despite this, the fund highlighted the need for additional revenue to finance further infrastructure and social spending and welcomed plans to implement a comprehensive tax reform that would be revenue positive, more equitable, and efficient.

“They urged the authorities to formulate a medium-term public infrastructure plan with clear project prioritization and appropriate choices between budget and PPP [public-private partnership] spending, with due consideration of contingent liabilities. Further efforts to strengthen public financial management and budget execution were also encouraged,” it said.

The public debt-to-GDP ratio is expected to decline, while the current account surplus is expected to decline in 2016 to 2017 due to higher commodity prices and infrastructure related imports.

Appropriate policy
The IMF directors considered the current monetary policy stance as appropriate in view of low inflation and near zero output gap, but noted the need for continued vigilance, particularly in light of fiscal stimulus.

They commended the Bangko Sentral ng Pilipinas (BSP) for the smooth implementation of the new interest rate corridor and deposit auctions, which will improve monetary policy transmission and help develop domestic capital markets.

On the other hand, they encouraged the BSP to stand ready to take measures if there are signs of overheating or accelerating credit growth.

Moving forward, the fund encouraged the passage of the central bank charter that would authorize the issuance of central bank securities and BSP recapitalization.

The financial system remains sound and expressed support to the authorities’ use of targeted prudential policies to strengthen resilience and limit systemic risks.

In line with this, the IMF said inflation is expected to return to within the BSP’s 2 percent to 4 percent target range later this year and in 2017 as commodity prices stabilize and strong economic activity continues.

The fund also welcomed the focus on financial deepening and inclusion as essential elements of the inclusive growth strategy.

The directors emphasized the importance of strengthening the anti-money laundering framework, including making tax evasion a predicate crime.

Vigorous growth
Vigorous economic growth is expected to continue through 2016, though at a more moderate pace in the second half as the impact of election spending fades, Manila-based ADB said in an update of its flagship “Asian Development Outlook 2016.”

“The outlook for the Philippine economy remains strong amid buoyant investment and domestic consumption,” said Richard Bolt, ADB country director for the Philippines.

“If successfully implemented, the new government’s development agenda to step up spending on infrastructure, implement tax reforms, and cut through red tape will sustain high growth rates and increase job creation,” he said.

A continuation of the strong growth hinges on advancing the reform agenda, which includes measures to address infrastructure bottlenecks, stronger efforts to develop rural and regional areas, and enhancing transparency and
accountability in government.

Fiscal policy is also expected to be expansionary in 2017, with the budget spending set to increase by 11.6 percent over the 2016 level, with significant increases earmarked for infrastructure, education, health, and social protection, it added.

The proposed tax changes, including lower corporate and personal income tax rates, are expected to improve the business environment and underpin further growth, with any reduction in tax revenue to be offset by a potential broadening of the value-added tax base, an increase in oil excise taxes, and the streamlining of current tax incentives to investors.

Foreign direct investment inflows almost doubled from January to June 2016 from last year, and the outlook for private investment remains favorable, particularly if the government follows through on commitments to ease the cost of doing business, address infrastructure bottlenecks, and accelerate public-private partnership projects, the study said.

Services, particularly retail trade, business process outsourcing and tourism, are key growth drivers over the forecast period, with international visitor arrivals up by over 13 percent year-on-year in the first half of 2016.

Inflation is expected to remain subdued at 1.8 percent for 2016, below the previous ADB forecast of 2.3 percent, with the impact of the drought on food prices less than anticipated.

However, inflation is seen moving up to 2.8 percent on average in 2017 as global oil prices and domestic demand rise.

ADB’s updated assessment noted key risks to the outlook include weaker than expected demand from major markets for Philippine exports.

Strengthening the rural economy is also key, given the higher prevalence of poverty in regions outside the main cities, the report said.

“Maintaining the domestic reform agenda will be vital to sustaining the solid economic performance. Risks from volatility on global financial markets are cushioned by the improved macroeconomic fundamentals and a robust banking sector,” it said.

On the contrary, Standard & Poor’s Global Ratings, HSBC, Metrobank Research, and Bank of the Philippine Islands (BPI) said they were keeping their previous economic projections for year. S&P maintained its 6.1 percent outlook, HSBC and Metrobank kept their forecasts at 6.3 percent and BPI at 6.2 percent.